Despite much hype of switching
over to Islamic Banking, the process is too slow.

SHAMIM AHMED RIZVI, Bureau Chief,
Islamabad
July 31 - Aug 06, 2006

Performing the opening ceremony of the
first Islamic bank in Pakistan, Dubai Islamic Bank, last week, Prime Minister
Shaukat Aziz observed that the idea of Islamic Banking was growing in popularity
and offering huge potential to be harnessed in this field by innovative bankers.
Many banks operating in Pakistan have set up counters of Shariah-complaint
banking for their customers, but opening of this exclusive Islamic bank is a
first serious initiative in Pakistan, Shaukat Aziz said hoping that it will be
received well by the people of Pakistan.

Askari Commercial Bank (ACB) entered
the arena of Islamic Banking with the inauguration of its first branch at
Rawalpindi. Askari Commercial Bank President Sheheryar Ahmed inaugurated the
first branch of the bank with more branches in line across all four provinces.
On this occasion, Mr. Sheheryar Ahmed gave an overall account of the bank's
strategy to develop and progress in Islamic banking. Mr Sheheryar who is well
familiar and has deep insight on the issues encompassing Islamic Banking has
been linked with the concept and practice of Islamic Banking for over two
decades when the concept was being discussed at various national forums in 80s.

Commenting on the concept and strategy
of Islamic Banking, he observed that though there are certain difficulties but
these can be sorted out with the passage of time and hard work. Responding to
query about investment tools and options, Sheheryar Ahmed said we have chalked
out plans and worked out various alternatives in this regard.

Of late, the State Bank of Pakistan has
taken many initiatives towards establishing the essential parameters of Islamic
Banking in the country. It has constituted a Shariah Board and would no more
allow establishment of new banks functioning on traditional lines. However,
despite much hype of switching over to Islamic Banking, the process is too slow.

The mode of Islamic Banking is not
getting popular as it should have been in the Muslim countries. This is the
position not only in Pakistan but applies to most of the Muslim countries, which
have introduced Islamic mode of financing, including Saudi Arabia. According to
a latest survey only 30 to 35 percent of the banks operating in Muslim countries
have adopted Islamic Banking. Reason being that it is neither in the interest of
depositors nor borrowers. Depositors get much lower returns on profit and loss
sharing accounts while depositors pay more in comparison to the conventional
mode of banking. The rates of markup payable to the House Building Finance
Corporation in Pakistan, which claims to follow the Islamic mode on housing
building loans comes to about 15 percent per annum as against 12% through
conventional banks. The depositors on profit and loss sharing basis receive a
return of 5 to 6 percent on their deposits.

In a recent press interview Dr. Shahid
Hassan Siddiqui, Chairman Research Institute of Islamic Banking and Finance said
that the system designed under the banner of Islamic Banking worldwide,
including Pakistan, has failed to achieve the objectives of prohibition of Riba
as laid down in the Verse 279 of Surah-e-Baqrah, which says: 'Deal not
unjustly'. The reason is that Islamic banks are following the benchmarks of
interest based banks and are not really adopting the true modes of financing,
based on profit and loss sharing i.e Musharaka and Mudaraba. The Islamic banks
have resorted to large scale financing on Murahaba and Ijara, etc. Like
interest-based banks, Islamic banks assume no responsibility for the operational
losses sustained by the entrepreneurs availing financing from Islamic banks. The
West is closely monitoring the performance and operation of Islamic banks
worldwide and many analysts see this system as a mere change of name.

Continuing, Dr. Shahid Hassan said that
it is unfortunately a fact that the spirit of Shariah is not being fully
observed, consequently leading to the continued exploitation of depositors and
investors. The number of those Muslims is increasing who either believe that
bank interest is not prohibited in Islam, while many others feel that on their
financing conventional banks lower their rate of markup/interest and enhance the
rate of returns/ profits when interest rates are higher in the conventional
banking system.

Islamic Banking is commonly defined as
that form of banking, which operates without the norm of interest. As a concept,
it is comparatively of recent origin. It is only during the last fifty years or
so that Shariah experts, scholars and economists in the Muslim world have made
stupendous efforts to develop the theoretical foundations and the operational
framework for Islamic Banking. As a consequence of these efforts, a vast
literature has appeared on the subject of Islamic Banking and the associated
themes such as Islamic economics, Islamic finance, and Islamic monetary system
and so on.

Another expert on the subject, Dr.
Aqdas Ali Kazmi, former Chief Economist in the Planning Commission of Pakistan,
in his article read at a seminar on the subject in Islamabad, said a critical
review of the literature on Islamic Banking and an evaluation of the so-called
Islamic banks operating globally lead to a startling but significant revelation:
Islamic banking both in theory and practice is nothing more than a mythology.
This mythology has a genesis, a structure and socio-economic implications, which
need to be analyzed in full detail.

By its definition, structure,
organization, functions and methodology, a bank cannot exist without interest.
These two concepts are too intertwined to be separated. Because of the
inseparability between a bank and the norm of interest, it can be concluded that
Islamic banking is a mythical and a contradictory concept. If the objective is
to abolish interest, the entire banking system will have to be scrapped
altogether. In other words, if the foundation of the banking superstructure,
namely the norm of interest has to be eliminated, the entire superstructure
would have to be dismantled. However, to justify Islamic Banking, the Shariah
experts, economists, banking and intellectuals have continued over the last five
decades or so to build a web of myths, which are increasing in number day by
day.

The first or the primary myth which has
gained common currency throughout the world is based on gross misinterpretation
of the Qura'anic verses on Riba, which have led to the conclusion that Riba
prohibited in the Qura'an and the bank interest are identical and as such
interest must be abolished from all tiers of the economy, including banking. The
Muslim scholars have never seriously and dispassionately discussed the three
basic and inter-related questions. What is Riba? What is interest? Are Riba and
interest co-equal or synonymous? As a result of the failure of Islamic scholars
to critically address these fundamental questions, the myths on Islamic Banking
continue to flourish.

The second myth around which the
concepts of Islamic Banking and Islamic economy are developed, points out that
interest is the basic cause of the ills from which modern economies suffer such
as unemployment, inflation, depression, income inequalities, poverty, etc.
Remove the norm of interest and the economic system would be fully purified (Islamized)
with no unemployment, no inflation and no income and wealth inequalities.

The third myth is in the form of the
popular claim that there are as many as 200 banking units or banking companies,
which operate around the globe without interest, and that these banks represent
alternative models to interest based banking. Even the Western secular banking
companies are not opening branches of Islamic banks or Islamic windows to cater
to the needs of Muslim investors.

The fourth myth is that J.M. Keynes as
one of the greatest economists of the twentieth century, in his numerous
writings has propounded and approved the structure of an economy which is free
from interest. The Qura'anic injunctions and interpretations forbidding interest
are thus supported by the worldly economists such as JM. Keynes.

The fifth myth is that the mode of
profit-loss sharing (PLS) is truly an Islamic mechanism and as such it can best
serve as the basis of Islamic banking. In other words, PLS can replace the norm
of interest in the banking industry and can give optimal results.

The sixth myth stipulates that Islamic
Banking will become a reality once the Islamic economic system is established in
its totality. In other worlds the successful launching of true Islamic Banking
is contingent upon realizing the objective of transforming the existing economic
system, which is secular in its outlook with the spirit on Islamic lines. If a
truly Islamic economic system is established in a particular country or
globally, operation of Islamic Banking and financial system will be feasible and
practicable.

The real issue is that the mythology of
Islamic Banking is being propagated as a new science throughout the Islamic
world. The Muslim scholars in Pakistan, Indonesia, Malaysia, Bangladesh, Sudan,
Iran, Egypt and Saudi Arabia etc. have taken the themes of Islamic Banking,
Islamic economics, etc. to a new level of research, interpretations and model
building. However, the process of Islamization of the banking and financial
system has serious implications for the future of economies of the Muslim
countries. In case, interest is abolished through an ordinance or an
administrative fiat, the Muslim world would face an unparalleled predicament of
economic disorder and disaster, Dr. Kazmi maintained in his research paper.

It seems that the State Bank is
determined to promote Islamic Banking in the country as early as possible. The
head of State Bank's Shariah Board had assured that Islamic Banking would be
promoted on fast track. It is, however, a general feeling that the country,
instead of rapid forward movement, needs to think more seriously and move
cautiously on this track. The views of people who think that modern interest
cannot be equated with Riba also should be given due consideration. There is
wide divergence in the interpretation of the nature and structure of Islamic
economy. An Islamic economy, for instance, could be defined as the welfare
economy characterized by higher employment of resources, including labour,
broad-based distribution of income and wealth and freedom from all forms of
corruption, exploitation and inequity. Analogously, concentration of wealth,
feudalism, monopolies and cartels in various enterprises and oligopolistic
tendencies are by definition repugnant to the Islamic spirit.

The policies of Islamization of the
economy, therefore, need to focus on land reforms and anti monopoly and anti
cartel measures etc. for wider distribution of industrial assets and means of
production. An Islamic state is obliged to pursue the objective of eliminating
poverty through well defined programmes and policies, provide universal literacy
and basic health facilities to all the citizens of the state, besides ensuring
that nobody dies from hunger. Also, there is no place for wasteful expenditures
and ostentatious living in Islam. According to some authors, modern interest is
the price paid for the use of capital like any other factor of production and
the notion that elimination of interest is a pre-requisite for an Islamic
economy is the outcome of misinterpretation of the concept of Riba. Keeping all
these things in view, sometimes one fails to understand why Islamic scholars in
our country are so much obsessed with Riba while other vices in the economy are
not paid even scant attention.

Another aspect, which also needs to be
taken into account, is that interest plays a pivotal role in the modern economic
system which has been developed over centuries through a lot of hard work and it
must be recognized that so far there is no serious alternative in theoretical
terms to challenge this entrenched system. That is why all attempts to purge
economies of the norm of interest have only led to zero sum game involving the
reemergence of interest in diverse guises such as 'markup', 'commission',
'fees', 'premium', 'service charges', etc. The present system being in vogue for
such a long time cannot be replaced with a stroke of pen. There are many thorny
issues, which have still to be resolved. These include the financing of fiscal
deficits, assurance of adequate returns to depositors in order to stimulate the
saving rate, removal of legal hitches and training of large number of bankers.

Experts are of the view that the State
Bank should not act in a haste but adopt a gradual approach after taking into
account all the relevant factors and also try to keep pace with other Islamic
countries, otherwise the financial system of the country which plays a crucial
role for the development of the country could face serious problems. In fact,
gradual and evolutionary approach towards Islamization of the banking system was
approved at the highest level of the government. It may also be mentioned that
eight Muslim countries, viz. Malaysia, Indonesia, Bahrain, Saudi Arabia, Sudan,
Iran, Kuwait and Pakistan as well as IDB had joined hands and launched Islamic
Financial Services Board (IFSB) in October 2002 for setting standards for
Islamic institutions. The report or recommendations of the IFSB probably have
not yet been finalized. For proper coordination between different Muslim
countries and to avoid sudden disruptions in the financial system of the
country, a very cautious approach needs to be adopted.